F. Scott Fitzgerald once said there are no second acts in American lives. However, after having spent 20 years in the IT industry, serving in various roles from system administration to network engineer (10 of which have been in education), I’ve recently decided that my second act should be as a freelance writer covering the investor's view of the technology industry. My background in engineering gave me what I consider strong analytical skills. My 15 years of trading and investing gives me the experience to assess equities and appraise their value. I am a Warren Buffett disciple that bases investment decisions on the quality of a company's management, its growth prospects, return on equity and price-to-earnings ratio. I employ conservative strategies to increase capital while also keeping a watchful eye on macro-economic events to mitigate downside risk.

Why Apple Vs. Samsung Is Like BMW Vs. Honda

There comes a time when an investor just has to “tip their cap” to certain market events. This is once they realize that something truly remarkable has happened – this is whether or not the result is favorable. Aside from helping us become better investors, it affirms that we think as “grown-ups.” This is where I’ve arrived with Samsung.

Even though I’m an unabashed cheerleader of Apple, when assessing Samsung’s ascent to the top of the Smartphone market, I have no choice but to give the South Korean giant its due credit. Though a lot has been made about Samsung’s recent dominance, many do not fully understand how this has happened. Likewise, there are very few who believe it will continue.

Although I am bullish Apple, I’m not so quick to dismiss Samsung’s ability to maintain its current lead. On the other hand, how Apple chooses to respond has a lot to do with Samsung’s next move. Complicating matters is the fact that other players such as Microsoft, Research in Motion and Nokia are now looking to recapture market share. How much they are able to steal from Apple and Samsung remains to be seen. But as it stands right now, it’s a two team race. Who will win?

It’s Class Warfare

You can draw your own conclusions about what has been said in the courts with the ongoing patent litigation between the two bitter rivals, but Samsung still had to execute its business. Samsung figured out what Research in Motion, Microsoft and Nokia was not able to understand – if you were not going to win in Apple’s market, you had to create your own.

To that end, Samsung separated the classes and moved up the rankings by executing two basic economic factors – cost and variety. Samsung proved that it understood Apple’s ecosystem better than other rivals. It also appreciated the fact that it was never going to attract Apple loyalists to buy Samsung phones. It’s like someone driving a BMW for years and expect a company such as Honda to try to win that customer over – It’s not likely to happen.

So Samsung decided to market to those who were only looking for Honda’s price tag and offering them all the trimmings. Essentially Samsung created a showroom where phones of all types with “Apple-like features” could appeal to a population that did not have “Apple-like money.” Samsung created a market where even those “choosy” customers could find a phone with a feature that they absolutely had to have – even better, and it cost less.

Still, Samsung was ready to drop its prices lower at a moment’s notice if it felt it had to, whereas Apple kept its price point the same. Again, this is because Apple operates with the mindset that BMWs sell themselves. It’s hard to fault Apple for this stance – particularly as it is growing revenues year-over-year at an average rate of 30%.

As with BMW, it can be said that Apple targets an “affluent” consumer base, the same population that helps Apple maintain its incredibly high margins. Still, given the speed at which Samsung has now stolen the top spot in device sales, it is safe to say that their strategy has worked to perfection – much better than Apple expected. But on the other hand, does Apple really care?

Why Apple Won’t Respond or Should It?

One of the reasons that continue to set Apple apart from other tech companies is its incredibly high margin leverage. Apple makes a lot of money from each device it sells. Should its pride supersede what is best for its business? This issue is not even worth debating. Samsung is now #1 in device sales – so what! If Apple wants to regain the top spot all it has to do is drop the price of its phones and tablets and watch all of the “Samsung enthusiasts” rush into Apple stores.

Though its margins would decline, it would still be the world’s most valuable company. But I don’t see why investors would want this. It should be noted that Apple also attracts a smarter base of investors. Likewise, Apple have suppliers all over the world fighting for its business, and it has no interest in entering Samsung’s low-end market. What’s the benefit of being the best selling device if it results in little to no earnings per share? After all, both Motorola and then Nokia once held the #1 ranking. Where are they now?

Bottom line

Apple sets trends it does not follow them. Some will proclaim that Apple has already started responding to Samsung with its recent launch of the iPad mini – I disagree. That the iPad mini carries a $329 price tag, which is over 60% higher than the $199 price of Amazon’s Kindle Fire and Google’s Nexus 7 should indicate where Apple’s mentality is. Then again there are always those who wish to compare a Honda to a BMW 3 series – then perhaps. Warren Buffett said “Price is what you pay, value is what you get.” In that instance, comparisons are not always apples-to-apples.

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Comments

Seriously, you are going to talk about Apple & security in the same sentence? You must not be old enough to remember why RIM thought nobody would ever switch to Apple – because security always wins. Look what happened there.

Apple has not changed their level of openness since… since like 1984. They tend to be a little more open that Microsoft. They are less open than Google Android. In order to give their customers a smooth, functional, relatively bug-free experience, Apple has chosen the magic ratio, and that has propelled them from a small computer company to the current largest company in the world. Android devices are more open and their user experience suffers for this. Look at all the articles written recently about Black Friday sales. The vast majority of people who actually do things and spend money use iPads and iPhones. WHy would you expect Apple to throw this system out the window and act like LINUX? Your post is illogical.

Well, it did. It didn’t win the desktop market, but today’s “computer” market isn’t only desktops like 10 years ago. 400 millions Android devices are Linux devices, with 1+ million devices activated per day. Android won (for now) the mobile OS market so did Linux. iOS vs Android is not a question of open vs closed platform at this point though, people don’t really care about that. People want cool or sometimes useful devices and choice, like you said. Samsung gives people all of these. If you want a cool “BMW like” device, you can buy a high end Samsung phone, which has more advanced hardware than Apple contemporary flagship devices, in general, because of a shorter release cycle. If you don’t want to spend iPhone range money, Samsung have decent mid range devices. The have huge, big, medium and small devices, with or without keyboard. That’s why they are winning, and on top of that, they have good marketing.

Good-one Richard! I think your article is great. Although the analogy may sound a bit out of place, the idea in-terms of how customer makes choices and what investors expect is excellent. The point that many people miss is that Apple has never been an inventor. However, they has always been good at commercialising technologies (maps are exception). When I buy Apple I look for a reliable device that can increase my productivity. However, I am not 100% convinced with the idea that Apple does not care. Cheers!!!

Actually tell that to the millions of people who select android over iOS :P

Although I agree that it is not just Open platform but the way it is executed. But it does demonstrate that given their user credit and and allow them customisation options without assuming that they will cause the phone to explode does have its merit.

Definitely agree. He seems to have that idea stuck in his head that iOS is so so much superior than Android and that iPhone spec is so so much better than others (not just Samsung Galaxy S3 or Note 2) .. which is so far away from the truth that I don’t know whether to laugh or cry